Opinion: Huge Aussie coal contract with China may help boost NZ$

By Danica Hampton The NZD was the worst performing currency last week. It tumbled about 2.7% against the USD to a 5-month low of nearly 0.6800. US non-farm payrolls was the highlight (or perhaps more correctly the lowlight) on Friday night. The US economy shed 20,000 jobs in January (worse than the +15,000 forecast). But the real kicker was the 930,000 worth of downward revisions to the year since March 2009. The soft jobs report cast doubts about the strength of the anticipated US economic recovery. The disappointing US payrolls report and ongoing anxiety about Europe's fiscal woes triggered heavy losses across global equities. The Hang Seng fell 3.3% and the DAX dropped 3.1%. At one stage, the S&P500 was down about 1.8%, but a late rally in technology stocks helped Wall Street recover as the night progressed. The S&P500 finished Friday up 0.3%, but down 0.7% for the week. Heavy losses across global equities and rising risk aversion took a toll on growth sensitive currencies like the NZD as investors rushed to the relative safety of the USD and JPY. Short-term speculative players and model-driven accounts continued to be active sellers of JPY crosses on Friday. NZD/JPY skidded from above 62.00 to around 60.50 and NZD/USD was dragged to nearly 0.6800 However, NZD found a base as equities started to turn and NZD/USD finished the week closer to 0.6900. G7 finance ministers met over the weekend. European policy makers tried to reassure their peers that the fiscal troubles in Greece were under control. We suspect the fiscal woes of Greece, Portugal and Spain will remain the spotlight again this week, while investors wait for a concrete plan from the EU to tackle the crisis. Despite assurances from EU officials at the weekend's G7, investors remain sceptical as to whether Europe can solve the crisis. But, it's not all bad news out there. The weekend press reported that Australia's Resourcehouse has announced an A$69b deal to supply coal to Chinese power stations. According to the company, this is Australia's biggest ever export contract. We'd expect this to help support the AUD (expect NZD to be dragged higher on its coat-tails) first up this morning. Locally, there's a bit to keep an eye on this week "“ including Q4 retail sales, January's REINZ housing market report and the BNZ PMI. However, global sentiment and risk aversion will likely be the key influence on NZD again this week. In the absence of another meltdown across global equities, we expect NZD/USD to find some support ahead of 0.6800 and stabilise a little this week. The USD and JPY were the strongest performing currencies on Friday night, amid mixed signals from US non-farm payrolls and ongoing anxiety about the fiscal problems in Europe. January's US non-farm payrolls showed that 20,000 jobs were shed during the month. Not only was this worse than the expected 15,000 gain, but heavy downward revisions to previous months meant that job losses in 2009 were far worse than previously reported. Despite the unemployment rate falling from 10% to 9.7%, the jobs report raised concern that the recovering economy may be slow to bring relief to workers. Red ink was seen across equity markets in Asia and Europe. Weak German industrial production data, poor Norwegian manufacturing data and the disappointing US payrolls all took a toll. The Hang Seng fell 3.3%, the DAX dropped 3.1% and the FTSE fell 2.5%. At one stage, the S&P500 was down about 1.8%, but a late rally in technology stocks helped Wall Street recover as the night progressed. The S&P500 finished Friday up 0.3%, but down 0.7% for the week. G7 finance ministers met over the weekend. European policy makers tried to reassure their peers that the fiscal troubles in Greece were under control. ECB President Trichet said he believed the Greek government would take all necessary steps to rein in its budget gap and Chairman of the Eurogroup Juncker dismissed the idea that Greece would need a bailout from the IMF. The G7 also generated the usual mumbles on currencies - that excess volatility in exchange rates can hurt economies and markets with inflexible currencies must consider strengthening them if the global economy is to be weaned off US spending and Asian saving. Escalating anxiety about the sovereign debt crisis in Europe dominated financial markets last week. The fiscal woes of Greece, Portugal and Spain will remain in the spotlight again this week, while investors wait for a concrete plan from the EU to tackle the crisis. Despite assurances from EU officials at the weekend's G7, investors remain sceptical as to whether Europe can solve the crisis. There's not a lot of key data due out of the US this week, but the first estimate of Q4 GDP is due in the Eurozone. This week's Chinese CPI and loan data will also be worth watching. China's efforts to curb lending have made investors jittery over the past few weeks and elevated readings from this week's data may well prompt further action from the PBOC. * Danica Hampton is BNZ's Senior Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.